ESG pressures will drive the use of ILS capacity by captives

09 July 2021

The ILS market in Guernsey sees the proliferation of ESG risks as the gateway to the convergence between captives and alternative capital, explains Walkers Partner Kate Storey in an article for Insurance Day.

With the growing focus on environmental, social and governance (ESG) principles and sustainable investing, development of innovative insurance-linked securities (ILS) products to cover new risks and the massive growth in new captives to deal with the hardening insurance market, it feels as though it will be a short matter of time before captives’ involvement with ILS is more commonplace.

Insurance managers in Guernsey have reported an increased interest from ILS investors in tapping into the expanded captive insurance market to offer an alternative source of reinsurance to captives. And as the ILS market evolves to cover new ESG-focused risks, corporations and their captives will become more comfortable using ILS, as will government investors, which will facilitate a broader user market for ILS.

Perhaps the most high-profile example of a captive using ILS is New York state's Metropolitan Transportation Authority, which, after Hurricane Sandy in 2013, used its captive to access $125m in protection from the ILS market after it struggled to renew its reinsurance policies following the storm.

As well as offering captives potentially cheaper and more flexible capacity than is available in the traditional reinsurance market, accessing the ILS market provides diversification to the sources of capital within captives' reinsurance panels, which is just as important as for a traditional insurer.

In addition, ILS reinsurance is fully collaborated, thereby minimising counterparty risk for the captive, and - particularly where parametric reinsurance is used - is a more efficient route to receiving claims payouts than traditional reinsurance.

Guernsey is leading the way on all of these fronts, on ESG, ILS and developments in the captive insurance sector.


It is a member on the UN's Sustainable Insurance Forum and the Guernsey International Insurance Association is a signatory to the UN's Sustainable Insurance Principles. Guernsey was the first jurisdiction to introduce a regulated, accredited, green investment fund product and has now developed an ESG accreditation framework for insurers, based on the UN's sustainable development goals, which can be used by captive insurers, commercial re/insurers and ILS special-purpose vehicles (SPIs).

The island has recently become home to the world's first volcano risk ILS structure for the Danish Red Cross, which is the very first humanitarian catastrophe bond covering "pure volcanic eruption". The bonds were settled using Guernsey-based Replexus's blockchain-based ILs platform, the ILS blockchain.

Guernsey was the first jurisdiction to introduce a "hybrid" investment fund and ILS structure through which it is possible to house investment fund cells and special-purpose insurer cells within one umbrella cell company structure, rather than using separate vehicles for the investment fund and the ILS insurer.

Another example of Guernsey innovation is the recent introduction of its pre-authorisation licensing regime for captive cells, whereby a captive cell can be established and start writing business within as little as 48 hours, provided the relevant documentation is submitted to the Guernsey regulator within 14 days of commencement of business.

This, in addition to the fast-track pre-authorisation regime for ILS SPIs, where ILS cells can start writing business on a pre-authorised basis provided the relevant documentation is submitted to the regulator within seven days after the ILS deal is entered into.

This article was first published in Insurance Day, May 2021.

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